We model the strategic interaction between a prosecutor and a defendant when informal sanctions by outside observers (society) may be imposed on both the defendant and the prosecutor. Outside observers rationally use the disposition of the case (plea bargain, case drop, acquittal, or conviction) to impose these sanctions, but also recognize that errors in the legal process (as well as hidden information) means they may misclassify defendants and thereby erroneously impose sanctions on both defendants and prosecutors. If third parties prefer a legal system with minimal regret arising from classification errors, there is a unique equilibrium wherein the guilty defendant accepts the prosecutor’s proposed plea offer with positive (but fractional) probability, the innocent defendant rejects the proposed offer, and the prosecutor chooses to take all defendants who reject the offer to trial.

We also consider the effect of increasing the informativeness of the jury’s decision by extending the model to allow for a three-verdict outcome (not guilty, not proven, and guilty), sometimes referred to as the “Scottish” verdict.

We find that: 1) guilty defendants are worse off, as plea bargains get tougher but the rejection rate does not change; 2) innocent defendants are better off; 3) the prosecutor’s overall payoff goes up; and 4) the outside observers’ regret over possible misapplication of informal sanctions is reduced. Thus the Scottish verdict is justice-improving when compared with the standard (two-outcome) verdict.